Fed. Energy Regulatory Comm'n v. Maxim Power Corp.

• Decision Date: 21 July 2016
• Docket Number: Civil No. 15-30113-MGM
• Citation: 196 F.Supp.3d 181
• Parties: FEDERAL ENERGY REGULATORY COMMISSION, Petitioner, v. MAXIM POWER CORP., et al., Respondents.
• Court: U.S. District Court — District of Massachusetts

196 F.Supp.3d 181

FEDERAL ENERGY REGULATORY COMMISSION, Petitioner,

v.MAXIM POWER CORP., et al., Respondents.

Civil No. 15-30113-MGM

United States District Court, D. Massachusetts.

Signed July 21, 2016

Thomas P. Olson, Aaron A. Fate, Andrew P. Tamayo, Geo. F. Hobday, Jr., Federal Energy Regulatory Commission, Washington, DC, for Petitioner.

Aric H. Wu, Gibson, Dunn & Crutcher LLP, New York, NY, Jason J. Fleischer, Kara B. Coen, Jennifer C. Mansh, William S. Scherman, Gibson, Dunn & Crutcher LLP, Washington, DC, Christopher M. Hennessey, Leonard Cohen, Sasha N. Kopf, Cohen Kinne Valicenti & Cook, LLP, Pittsfield, MA, for Respondents.

MEMORANDUM AND ORDER REGARDING PROCEDURES APPLICABLE TO FERC'S PETITION AND RESPONDENTS' MOTION TO DISMISS

(Dkt. No. 16)

MASTROIANNI, UNITED STATES DISTRICT JUDGE.

I. INTRODUCTION

The Federal Energy Regulatory Commission ("FERC," the "Commission," or "Petitioner") filed a petition for an order affirming its May 1, 2015 Order Assessing Civil Penalties (the "FERC Order") against Maxim Power Corp.; Maxim Power (USA), Inc.; Maxim Power (USA) Holding Company Inc.; Pawtucket Power Holding Company, LLC; Pittsfield Generating Company, LP (collectively, "Maxim"); and an individual employee named Kyle Mitton (together with Maxim, the "Respondents"). The FERC Order penalized Respondents for engaging in energy market manipulation and for submitting false or misleading information, or omitting material information, to FERC-approved regulatory entities in connection with an alleged scheme to obtain excessive payments for energy supplied in the summer of 2010. The FERC Order called for a $5 million penalty against Maxim and a $50,000 penalty against Mr. Mitton. As contemplated by the procedures of the Federal Power Act ("FPA"), Respondents have elected not to pay the penalty, and FERC has filed this petition to affirm its order. There are two claims asserted against Respondents. The first is for violation of the anti-manipulation provisions of the FPA, 16 U.S.C. § 824v, and FERC's rules, 18 C.F.R. § 1c.2. The second is for violation of FERC's candor rule, 18 C.F.R. § 35.41(b).

This opinion first sets forth the relevant facts. It then discusses the issue of applicable procedures, which is the source of considerable dispute between the parties and is a matter of first impression. In short, the court concludes that this case is to be treated as an ordinary civil action requiring a trial de novo , but with limitations on the discovery process in order to promote an efficient resolution of the case. The opinion then addresses the substance of Respondents' motion to dismiss, which the court denies. Finally, the court sets forth procedural guidelines for the parties to follow.

II. FACTS

A. The New England Electricity Markets and the Relevant Entities

FERC is the federal administrative agency that regulates energy markets in the United States. ISO-NE is the FERC-regulated organization that operates New England's wholesale energy markets. (Dkt. No. 1, Pet. ¶ 2.) ISO-NE purchases electricity from generators and resells that electricity to consumers. (Id. ¶ 33.) ISO-NE operates two markets. In the day-ahead market, electricity is bought and sold one day prior to its delivery. In the real-time market, electricity is bought and sold on the same day as its delivery. (Id. ¶ 34.) ISO-NE typically purchases electricity from generators based on the lowest prices offered. The price at which ISO-NE purchases electricity is the market price. Sometimes, to ensure the reliability of the electric grid during periods of high demand, ISO-NE may require a generator to operate even though its offer was above the market price. (Id. ¶ 33.) This is known as "dispatching" the generator. To prevent dispatched generators from exploiting their market power, ISO-NE does not pay dispatched generators based on their offer prices. Instead, ISO-NE limits, or "mitigates," payments to dispatched generators to the cost of the fuel burned, plus 10%. (Id. ¶ 35.)

Maxim owns and operates a power plant in Pittsfield, Massachusetts. (Id. ¶¶ 29-30.) The Pittsfield plant can burn either oil or natural gas to generate electricity. The Pittsfield plant obtains natural gas through a pipeline connection with Tennessee Gas Pipeline Company ("TGP"). (Id. ¶ 31.) The Pittsfield plant has on-site storage for oil, but not for natural gas. During the relevant period, Mr. Mitton was a senior analyst at Maxim and often decided at what prices it would offer in to the day-ahead market. Managing daily fuel risk is a major part of the competitive and financial analysis for Maxim. (Dkt. No. 17, Respondents' Mem. Supp. Mot. to Dismiss ("Resp. Mem.") at 6.)

B. The Alleged Scheme and Misrepresentations

July and August 2010 were particularly hot months in New England, leading to increased demand for electricity. (Pet. ¶ 37.) During the summer of 2010, natural gas was almost always a cheaper fuel source than oil for generators to acquire and burn. (Id. ¶ 31.) Given increased demand for natural gas, TGP issued pipeline restriction notices throughout the summer of 2010, constraining generators' ability to purchase natural gas. In July and August 2010, ISO-NE dispatched the Pittsfield plant on most days to help ensure grid reliability. (Id. ¶ 37.) Maxim's offers into ISO-NE's day-ahead market were due by 12:00 pm ET each day. (Id. ¶ 34.) Maxim's nominations to purchase gas from TGP were due by 12:30 pm ET each day. (Resp. Mem. at 7.) ISO-NE notified Maxim by 4:00 pm ET each day if it had received a commitment to operate the following day. (Id. )

In the summer of 2010, oil prices were about $175 per MWh (the standard unit for wholesale electricity), while natural gas prices were about $75/MWh. (Pet. ¶ 38.) This substantial difference of approximately $100/MWh meant that Maxim could obtain greater profits if it acquired and burned natural gas but was paid based on oil prices. At the same time, Maxim could suffer severe losses if it obtained and burned oil, but was paid based on natural gas prices. Whether Maxim's actions were fraudulent attempts to obtain greater profits or reasonable economic decisions to avoid severe losses is the crux of the parties' disagreement.

For 38 of the 45 days between July 5, 2010 and August 18, 2010, Maxim submitted day-ahead offers for the Pittsfield plant based on higher oil prices, rather than lower natural gas prices. On 22 of those 38 days, ISO-NE dispatched the Pittsfield plant and paid Maxim based on the oil prices offered, but the Pittsfield plant actually burned "all or nearly all" natural gas at a much lower cost. FERC alleges that, on 11 of these 22 days, Maxim had already contracted to purchase natural gas from TGP before the 12:00 pm deadline for submitting day-ahead offers. (Id. ¶ 37.) Maxim contends that, on all 22 of these days, ISO-NE increased the hours the Pittsfield plant was required to operate, and Maxim had to either purchase natural gas in the more expensive same-day market or burn more expensive oil in conjunction with natural gas. (Resp. Mem. at 10.)

Mr. Mitton played a substantial role in Maxim's price offers. (Pet. ¶¶ 32, 38.) FERC alleges Maxim knew it would obtain higher profits if the Pittsfield plant was dispatched and paid for more expensive oil while it actually burned cheaper natural gas, so long as it kept ISO-NE from learning which fuel it was actually burning. (Id. ¶¶ 39-40.) On July 15, 2010, John Angeli from ISO-NE left a voicemail for Mr. Mitton asking about the "offer price" for the Pittsfield plant. On July 16, 2010, Mr. Mitton responded with an email stating: "We have been offering the unit in conservatively on fuel oil due to the daily gas restrictions on [TGP]. I can provide you the restriction notices for your records if you like." (Id. ¶ 41.) That same day, ISO-NE requested the documentation that Mr. Mitton had mentioned. On July 19, 2010, copying his supervisor Eagle Kwok, Mr. Mitton emailed ISO-NE documentation showing the TGP restriction notices for July 2010. Mr. Mitton explained that the restrictions "have been a serious issue." (Id. ¶ 42.) He also explained that, because the Pittsfield plant would face "extremely severe" penalties if it burned gas it had not purchased, "to protect ourselves we have been offering in on fuel oil to control our risk exposure." (Resp. Mem. at 10.) He also asked if ISO-NE would like to be notified in the future when the Pittsfield plant is "offering on fuel oil due to gas pipeline restrictions." (Dkt. No. 18, Ex. F.)

On July 20, 2010, ISO-NE responded with a request to Maxim: "when you have a fuel issue please let us [know] so we can model the unit on the correct fuel." Mr. Mitton responded that Maxim would do so, and stated that "[a]s a heads up we are in on fuel oil again for tomorrow." (Pet. ¶ 43; Dkt. No. 30, Ex. L.) Later on the same day, Maxim manager Chris Devasahayam sent an internal email about market rules to Mr. Mitton and Mr. Kwok. He stated that ISO-NE has the power to mitigate offer prices that have a material effect on dispatch payments, and that ISO-NE must go through three steps of investigation. The first step is to "investigate reasons for the offer," and only "if they are not convinced" will ISO-NE proceed to the second and third steps, which involve testing the effects of offer prices on dispatch payments. The email stated that "if we can provide [ISO-NE] with the rationalization behind our pricing, it won't get to the 2nd or 3rd stages." It then listed reasons to explain Maxim's pricing, including difficulty obtaining gas during pipeline restrictions and the need for risk management. (Pet. ¶ 46; Dkt. No. 18, Ex. J.)

On August 16, 2010, Richard Dominguez from ISO-NE sent Maxim an email stating that, "[i]n our standard review process," the Pittsfield plant had violated the threshold screen for dispatch payments. The email asked Maxim to provide fuel burn data for most of the days in July 2010. (Pet. ¶ 47; Dkt. No. 18, Ex. I.) On August 18, 2010, according to...